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Friday, June 15, 2012

Which way will head Interest Rates?

Industrial production growth near zero, poor monsoon and so on….Most pitiable thing is that in this situation alsothere is no concern in government to act. Reserve Bank of Indiais in dilemma which way should it tilt the interest rates.

RBI hasscheduled mid quarter review of the credit policy on June 18.Fear of inflation has kept the interest rates high which has led to the anticipated fall in industrial production growth. India’s industrial production growth has come to a standstill, with factory output expanding by just 0.1 per cent in April. Fortunately government has an excuse ready, “ It is all because of crisis in Europe”.Until Europe Euro zone is resolved babus in the government need not to bother.

RBI was waitingfor asharp drop in pricesto go in for an aggressive rate cut.Inflation at 7.23 per cent in Aprilwasconsidered way ahead of the RBI’s comfort zone.But May data has further deepen the crisis. Wholesale prices accelerated in May to 7.55%

Mantok Singh Ahluwalia

Contraction in trade deficitto $16.2 billon has very little to cheer aboutas exports shrunk by4.1% . Non oil imports have contracted by 12% in May over the same period last year. The country’s economy grew 5.3% in the March quarter, its lowest level in nine years. India’s GDP growth for the full fiscal remained at 6.5 %. The economy had expanded by 8.4% in the preceding two years.

Deputy chairman of India’s Planning CommissionMontek Singh Ahluwalia, is still hopefulthat the country’s economic growth willturnaround in the July-September quarter.He expects India to grow @ 6.5-7.0% in the 2012/13 fiscal year that started in April.

However, as per theNational Council for Applied Economic Research (NCAER), India’s economic growth is likely to remain subdued in the next two quarters as global economic slowdown will continue to hamper domestic growth prospects. The economists at NCAER assume, “The global economy is in a very difficult period. What is happening in Europe will impact all the developing countries, including India.”

In this scenario, RBI’s interest policy proves to be a double edged sword. Whether, it should try to stimulate the growth by lowering interest rate or keep the inflation under check and keep the interest rates high. There is a division within both the government and the RBI, with many saying that the central bank’s primary responsibility is to curb inflation and not to boost growth. Any increase in inflation will make it difficult for the RBI to cut interest rates sharply.

Then where is the solution?Chairman emeritus of Infosys Techonologies NR Narayana Murthy in an interview this week said that for the country to get a growth rate of 8-9%, it needed to build very heavy infrastructure. This build, he said, would need investments of $1-1.5 trillion. “Such a large pool of capital cannot come from India alone.”

Similar concerns were expressed by the world bank.The reforms in the infrastructure have not taken place, which has marred the growth prospects of the country. Will the government listen to this and come out of inaction?